An opportunity as big as a continent!

(Dec 2, 2011)

In this issue:
» A shocking revelation about the US Fed
» Scarcity of this most fundamental resource a threat to India...
» Manufacturing slows down across the globe
» India top recipient of remittances four years in a row
» ...and more!

Of all our emotions, fear almost always seems to be on top of the list. Human beings have an innate tendency to focus their attention more on gloomy and negative events and threats. It comes as no surprise that all the media are loaded with stuff that feeds exactly this kind of appetite.

The financial press is abuzz with doomsday scenarios. Several developed economies are crumbling under the weight of debt. Emerging economies are engulfed with concerns of slowing growth and high inflation. The recent hammering of Indian stock markets is a clear vote of fear and uncertainty. Is there absolutely nothing in the world economy to cheer about? We don't think so.

Amidst all the gloom and chaos, a continent by the name of Africa is quietly on the rise. After centuries of stagnation and political turmoil, the last decade has witnessed a remarkable shift on this continent. The Economist has shared some interesting statistics. "Over the past decade six of the world's ten fastest-growing countries were African. In eight of the past ten years, Africa has grown faster than East Asia, including Japan. Even allowing for the knock-on effect of the northern hemisphere's slowdown, the IMF (International Monetary Fund) expects Africa to grow by 6% this year and by nearly 6% in 2012, about the same as Asia." While a significant amount of credit for the growth goes to the commodity boom because of region's rich natural resources. But Africa is also steadily gearing up on the manufacturing and services front. The continent is also gifted with a favourable demographic profile.

Of course, the positives must be taken with a pinch of salt as a large part of the continent is still embroiled in poverty, corruption and hordes of social and political issues. But problem also means opportunity. While China has scooped up the prospect and made huge investments in Africa, many other countries, including India, are waking up to the continent's improving prospects.

Today's chart of the day shows the global debt as a percentage of GDP (Gross Domestic Product) over the last decade. To put it simply, imagine the entire global economy as a single entity that is saddled with debt which is three times its income. The debt has grown at a compounded rate of 11% over stated period and stood as tall as 310% of GDP in 2010. Historically, debt to GDP has gone over 200% only during times of war. So this means that we are in a very risky global environment and are likely to witness many big defaults and bankruptcies.

Data source: Business Insider

01:38

Does the word TARP ring a bell? Yes, it is the very same bailout program that helped the US financial system in avoiding a total disintegration. And it was not without its fair share of controversies. People were outraged that money to the tune of hundreds of billions of dollars was spent towards rescuing institutions that didn't deserve this lifeline one bit. Now, what if we tell you that the act that the US Federal Reserve indulged in made even the TARP (Troubled Assets Relief Program) program look like pocket change. Shocking, isn't it? A recent compulsory audit of the Federal Reserve has brought to the fore this harsh reality. As per the audit document, the bailout that the Federal Reserve orchestrated carried a value of a mindboggling US$ 16 trillion. To get an idea of how big this figure is, it should be borne in mind that the total US GDP is itself in the vicinity of US$ 15 trillion. Indeed, the bailout by the Federal Reserve is nothing short of daylight robbery. No wonder the cries for shutting down the Federal Reserve or the printing press for that matter, are getting louder by the day.

02:11

Commodities like gold, silver and agri-products may be what most investors are watching out for. But there is another that is critical to watch out. One that may not risk our portfolio returns but certainly our survival. And the critical commodity is water. For most other consumables, the per capita availability has improved for Indians over the years. But in the case of water, the same has dropped by a drastic 70% over the past 60 years. What's more, it is expected to drop by a third in another 40 years! Yes, water currently may not enjoy the kind of conservation efforts that energy resources do. But as per a report by CRISIL, companies having a reckless approach to water usage are likely to risk their long term prospects. The growing scarcity and pollution of water, coupled with challenges arising out of climate change could pose serious risks to industrial and business operations in India. The companies that continue to have a cavalier approach towards use of water and waste water discharge have faced regulatory and reputational damages. This has had a significant impact on their financial performance as well. Thus consumers of this scarce commodity, whether retail or industrial should take its conservation more seriously.

02:49

The crisis in Europe is beginning to take its toll on industries across the world. This was all the more evident last month when manufacturing weakened from China to Europe. In Britain and the 17-nation Euro area, manufacturing shrank at the fastest pace in about two and a half years as the region edged toward recession. This impact was felt by China as well, as its manufacturing contracted in November for the first time since February 2009 on the back of a cooling property market and a cut in export demand. What has also dampened sentiments is that the European crisis is so deep that its members may not be able to come up with a solution to survive this crisis. Surprisingly, the US appeared to have fared better than its beleaguered peer as its production in November grew at the fastest pace in 5 months. However, one wonders whether this growth will be sustainable going forward given that the US is also deep in debt like Europe is. With the crisis deepening, European governments are under pressure to trim spending and this is felt by companies there as well as they face pressure to cut costs, all translating into a weak export scenario for Asian economies exporting to the region.

03:28

Legendary investor George Soros has gone a step further ahead from the others and has stated that the world's financial system is on the brink of a collapse. This is thanks to the deflationary debt cycle that has gripped the developed world. As a result, the developed world is running headlong into the wall of disaster. But all is not dreary and dark. As Soros opines, the developing world will definitely fare better than its developed counterparts. As per him, the emerging markets in Asia and Africa would be the shining stars in the dim global economy. As a result, he expects a large quantum of investment money to flow into these markets in the coming months. But it is important to note here that the developing world have their own troubles in the form of runaway inflation and higher interest rates. Combine this with the high levels of corruption in most of these economies; it would be better for investors to be cautious when it comes to investing in them.

04:00

India and China both have billion plus populations. Millions of their citizens work in different parts of the globe and often send a portion of their earnings back home. Thus, it is not surprising that both nations are closely vying for the title of the world's top recipient of official remittances. According to World Bank estimates, India is expected to receive US$ 58 bn in 2011, closely followed by US$ 57 bn to China. Mexico is expected to come in a distant third with US$ 24 bn flowing back to the country. India is thus expected to retain the top spot for the fourth year running. However, the significant rupee depreciation this year has helped India's cause. But, with immigration norms tightening in Europe and the US we are not sure how long India will be able to retain its top spot.

04:28

In the meanwhile, in line with global indices, the Indian stock markets gained on account of buying interest in heavyweights, thus, sending the BSE-Sensex up by 196 points at the time of writing. Stocks from the banking and metal are leading the pack of gainers. The key Asian indices, barring China, closed in the green today and Europe, too, is trading in the positive currently.

04:50

Today's investing mantra

"The most important attribute for success in value investing is patience, patience, and more patience. The majority of investors do not possess this characteristic." - Peter Cundill

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Always what is small has a scope to grow fast. What is already grown, grows further but slow. So India's 7-8-9% is no big achievement. And this growth figure on what base?? Even Africa or many other countries are growing @ 6-7 %.

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